Enabling customer centricity with technology

You have 25 years of experience in international financial services and ICT, how has the financial services industry evolve on that period from your point of view?

“The basics of banking and financial intermediation have actually not changed, the fundamentals are still there. However, many things have changed. Technology and globalisation have had a tremendous impact in all industries and financial services is no exception. But, in my opinion, in the past few years the most profound changes have come from the evolving role of banks in the general economy and, more fundamentally, the expectations customers have of their financial service providers.

Regulatory oversight is at an all time high. Arguably, far too high. The global financial crisis and the increased fight against terrorism financing have increased exponentially the breadth and the depth of regulatory domains and concerns. In the western world, more so than anywhere else, banks are seen as the first line of defence. Regulatory initiatives (KYC, KYCC, AML, Sanctions, Basle III, MiFID, Sarbanes/Oxley, Dodd-Frank, G-SIBs, etc.) have forced banks to improve their controls and culture, increase substantially their reserves, “prepare for their own death”, and be more circumspect on whom they take as a customer.

The other big change in the last few years is that customers have become more demanding of their financial services providers. The Internet has been the trigger. It really changed the way in which people expect to be served. They expect immediate service, available anytime and anywhere, and specifically tailored for them. The financial services sector is following that trend, although it has been much slower in financial services than in some other industries. Technology has made the transition from supplier centricity to customer centricity easier.

And looking forward, what do you think will be the bank of the future?

“The bank of the future is digital and much more customer-centric. It is one that offers a tailored proposition that is specific to each customer, and that is totally adapted to the needs of the individual.

We are now witnessing loads of innovation activity in financial services triggered by the impact of technology and, maybe more importantly, by the new business models that are created as a consequence. That is the ‘FinTech’ world. FinTech companies, which come with a technology proposition, are focused on customer centricity. They introduce new customer centric propositions to replace services that are currently supplier-centric.

This move is bringing new entrants to the market with a customer and technology focus. Some of them will even have a banking license (e.g. PayPal) and we may end up calling them “banks” for short.

Do you see digitization as the reason why financial institutions are shifting toward customer centricity?

“Banks are being forced to shift. Customers are more demanding than ever, they now know what they want. And there are new entrants in the market which want to respond to those needs. Technology is an enabler for that.

The mistake people make is to consider digitization as the next step of automation. It is not the same thing to use technology to make processes easier, faster and cheaper, than to digitize your proposition. A digital bank is not one that is automated, it is one that is much more integrated with our digital life. It is not a traditional bank with a digital channel, it is about building a new proposition based on customer needs instead of presenting the same portfolio of products through a different channel.”

You recently created FinTechStage, a network of FinTech innovators. Can you tell us a bit more on the context of the creation of FinTechStage. Why and how was it created?

"FinTechStage is a network of individuals who want to drive innovation in the financial services industry. It brings together people who want to disrupt, people who understand that existing financial services providers are not responding to the needs.

What brings us together is two things: -1- understand and guide investment in FinTech innovation, and -2- create innovation and investment ecosystems in all financial centers. People do not come to FinTechStage to give speeches; they come to talk to each other. FinTechStage insiders are peers concerned by the same issues, they are investors, innovators, and start-ups providing new solutions.

Presently, for a FinTech start-up to succeed it needs to move to either London or to New York. Outside those cities, there are no ecosystems where investors, innovators and customers can meet. If you are in Milan and have a great idea about FinTech, you have to take your team to London, sign-up to an incubator/accelerator and find somebody who sees value in your proposition. Most start-ups don’t have the backing nor the money to do that. We need to foster the creation of investment ecosystems in every financial center. That is why FinTechStage goes to those cities to convene local investors, banks, government agencies and innovators to create ecosystems in support of local start-ups.”

Is it the purpose to have big banks in this ecosystem?

“The big banks are there too, we do have large institutions in our list of insiders.

It is a usual mistake to think of banks as a single entity. Banks are large organizations, and not surprisingly, do not have one single view on how they are going to innovate. In my experience, very few institutions have a coherent innovation strategy that is in line with their business strategy. And even fewer have the right culture for innovation to flourish.

Traditional institutions most frequently have one group of people responsible for investment capital (basically focused on financial returns), then an innovation group that is looking at start-ups and entrepreneurs who have bright ideas (looking for breakthroughs), and finally a third group that actually owns the strategy of the bank. The difficulty lays on finding institutions that have a strategy that includes innovation at the heart with an innovation group that is in line with the core strategy of the bank, and a venture capital group that is actively investing in start-ups that are linked to that strategy.

Very few organizations have the three groups working together in unison. Core strategy often goes in one way, strategic investment goes another way and the innovation group is desperately trying to define common ground for everybody.”

Does it make sense for banks to team up with a third party to innovate?

“My short answer is yes. However, big banks have a huge problem partnering with smaller institutions, and essentially with start-ups. The cultures are very different. Entrepreneurs hardly get a central position in the very hierarchical organization of banks and they do not do well as “intrapreneurs”.

Knowing that, financial institutions generally keep the start-ups separate, they do not integrate and just keep them on the side. That is likely to be a more successful approach: any attempt to bring start-ups inside a large institution is very complicated and normally kills the smaller organism. So it makes total sense for banks to team up with a third party, but in practice it is very difficult.”

Why do you think that these innovation could only come from outside a bank or an insurance company?

At SWIFT* in 2008 we created a specific platform called Innotribe at a time when the term FinTech did not exist yet. What I wanted with Innotribe was to create a platform to foster innovation in the industry. Financial services are heavily regulated and there are very good reasons why the financial sector is not at the forefront of innovation. We wanted to create an industry platform for innovation and, at the same time, push SWIFT to become more innovative.

What we found out very quickly was that the time was right for creating an innovation platform for the industry. Innotribe was hugely successful because the industry was ready to talk about innovation collectively. But within SWIFT it was a much more difficult thing to do. Internal processes were not geared towards innovation. In fact, quite the opposite. SWIFT was good at quality of service, security, availability; in short, peace of mind. Taking the risks inherent in innovation was the total opposite of the “failure not an option” culture at SWIFT.

Very few organizations are geared that way, and banks are not different. Intrapreneurship is a form of rebellion. Large organizations generally do not have a culture that works well with rebellion. They have hierarchies and strict decision-making processes while innovation needs creativity, it needs the opportunity to fail quickly and try again. That is not what banks and financial services providers are all about.”

Do you think large financial services providers can/should change their culture?

“There are hundreds of examples of the fact that the larger the organization the more difficult it is to think outside of the box. But that is what is needed now. We need people who do not have those corporate constraints, who can think differently, try new ideas and come up with propositions that customers really want.

What is happening now in financial services is what happened in the pharma industry many years ago. Pharmaceutical companies used to have their own research and development departments, they used to invest loads of money to come up with new drugs. At a certain moment they realised that those R&D processes were very costly while not being a source of predictable innovation. Therefore they span-off their R&D departments and created small independent labs. They outsourced innovation to smaller entities that were more flexible and nimble.

Banks never really had R&D departments but FinTech start-ups are actually the equivalent of those laboratories for the pharma industry. They offer a much more cost-effective way to drive innovation.

Now the question is how to link those start-ups with the financial services providers and make them compatible, to avoid that the start-ups take market share away from financial services providers.”

From your experience can you speak about one successful example of a financial institution making use of external innovation?

“ING Direct is one of the great examples of creating from scratch a digital proposition for customers in Europe. They did not consider digital as another channel, they defined digital as the only channel. They created a full digital proposition for the customer and they were very successful. In that case they did not buy anybody and were able to create a parallel proposition.

There are also examples of little start-ups that have become successful without the banks. PayPal was for example created from the need to have a payment mechanism for Ebay. They wanted to team up with banks but nobody was interested. So they started to move on their own and have been very successful. In the US they can operate as a company without a banking license, in Europe they are now a bank.”

Are FinTech start-ups a threat for big banks? Or are they real potential partners?

“The uniqueness of banks is that they are protected “species” in a way because they are the regulated distribution network for money. They have a monopoly in some of the functions they fulfil.

There is no choice: start-ups and large banks will have to work together. The Paypal case is interesting because in Europe they had to acquire a banking license, they are now part of the system. I think they are obliged to work together and the issue is how that happens. Now all banks have an innovation agenda and many of them have created a fund to invest in FinTech start-ups. We will see models in which start-ups work very well with financial institutions, and we will also see other models where start-ups are competing with financial institutions.

A caveat is that the most successful start-ups are those which are attacking market segments that are not well served by large institutions. For example, while SMEs and individuals now find it difficult to get loans, a whole new segment of alternative lending providers are entering the market.”

To sum up what are the keys for innovation at large financial institutions to be successful?

“There is not one answer, every institution is different. However, I think four principles are key:

Innovate at the core. Align core strategy with innovation and investment strategies. Do not treat innovation as a secondary thing on the side, it has to be at the centre of a bank’s strategy. It needs to become part of the culture.

Embrace start-ups. Be open to complement your offering with external innovative offerings. Find ways to internalise the new offering seamlessly into your proposition.

Overall I think the biggest challenge for banks is not technology or regulation, the biggest challenge is one of culture. Banks so far have not been responsive to customer requirements. Banks respond to perceived needs with a portfolio of products and often forget to look at it from a customer perspective. They have to do it the other way around. Creating a customer-centric and innovative culture is their biggest challenge.”